Mounting debts, low tax collection and years of wasteful spending have forced public spending cuts at a time wealth inequality is rising

Pupils wave national flags during a ceremony at a local elementary school in Hanoi, Vietnam, on September 5, 2014. Photo: AFP/Hoang Dinh Nam

Vietnam’s leading politician Nguyen Phu Trong had some advice for his socialist cousins during a recent visit to Cuba. Embrace market-oriented reforms, he said, and don’t fear that economic liberalization will necessarily lead to political liberalization.

“The market economy of its own cannot destroy socialism,” said Trong, General Secretary of Vietnam’s ruling Communist Party, when in Havana. “But to build socialism with success it is necessary to develop a market economy in an adequate and correct way.”

Trong might think that socialism in Vietnam isn’t yet dead – far from it – but it is increasingly hard to miss is that its state sector is fast withering away, reduced to a lumpen state amid market forces and the Party’s own inadequacies in financial and economic management.

Last year, the largest company in Vietnam wasn’t PetroVietnam, the state-owned oil giant that has long been the nation’s top earner, but rather Samsung Electronics’ local subsidiary, which earned US$58 billion in revenue.

Samsung, a South Korean conglomerate, has invested US$17 billion in Vietnam over the years, turning the country into the second-largest exporter of smartphones after China. A quarter of Vietnam’s exports last year, worth US$214 billion, were made in Samsung factories.

It is estimated that 20% of Vietnam’s gross domestic product (GDP) is now generated by foreign invested firms. Moreover, these foreign-owned firms are growing doubly as fast as Vietnam’s many hidebound state-owned enterprises (SOEs).

In 2013, SOEs received almost 45% of all state investment and 60% of commercial bank lending, yet they contributed to just 30% of country’s GDP, according to Ministry of Planning and Investment figures.

Economic analysts think that rates of investment and loans haven’t shrunk substantially in recent years, but SOEs’ importance as a driver of the national economy certainly has.

As a result, Hanoi is desperately trying to jettison its state-owned firms, even the most lucrative ones. In 1990, all firms were state-owned. By 2002, there were roughly 15,000 state majority-owned businesses. Today, there are thought to be around 2,000, according to industry analysts.

In December, a public offering of shares in the state-owned Saigon Alcohol Beer and Beverage (Sabeco), Vietnam’s largest brewery, generated US$4.8 billion. Others like Vinamilk, the country’s largest producer of dairy products, have seen state ownership dwindle from 100% in 2003 to just 36% today.

The sale of stakes in lucrative state-owned firms is one way of raising capital for government expenditure and meeting budgetary gaps. But analysts reckon the number of majority state-owned firms could fall to less than 100 within the next decade.

If state sector firms appear to be on the wane, so too are public sector services. Earlier this month, the Ministry of Public Security said it would slash the number of police officers it keeps on staff. It had stopped recruiting new cops in 2016.

A policeman blocks photographers from taking pictures in front of the Opera House in Hanoi in a file photo. Photo: Reuters/Nguyen Lan Thang

The ministry now suggests it could cut its number administrative units by almost a half, from 130 to 60, without having a detrimental effect on policing or security. One senior ministry official recently told local media it aims to build a “more effective” and more “focused and lean machine” through staffing cuts.

It will be harder to make that argument for education cuts. This month hundreds of teachers were laid off in Gia Lai province, in the central highlands, where local authorities claim there is an oversupply of teachers. Independent commentators say there is actually a shortage, which has led to crowded classrooms and poor standards.

Other provinces have also been forced to sack teachers in recent months, part of the government’s wider belt-tightening. One National Assembly deputy recently referred to the teacher lay-offs as “a deep wound to the entire national education system.”

Even so, more cuts are on the way. Prime Minister Nguyen Xuan Phuc recently established a task force to look into trimming others sectors of the state payroll.

Mounting government debt, persistent budget deficits, low tax collection and wasteful state spending means the government is now in full austerity mode. At the same time, concerns about wealth inequality are rising, a worrying development for a nominally socialist society.

The recently published Provincial Governance and Public Administration Performance Index, a report compiled by state and non-state actors, found that Vietnamese people believe poverty is now their main concern; in the past it was graft.

In 2016, just 13% of respondents said that their financial situation was deteriorating. The latest report saw this figure climb to 21%. Only 52% of respondents now think they will be richer in the next five years; the rest reckon they will get poorer, stay the same or didn’t know.

In tune with its past financial mishandling, the government has fuddled over what to do about the public sector. At the moment, the basic minimum wage for civil servants is US$57 per month. In July, this paltry amount will increase by around US$4 a month, not nearly enough to keep pace with a fast rising cost of living.

Analysts say those low wages exacerbate Vietnam’s mounting petty graft problem, which saw the country come second-bottom on a recent report by Transparency International, a global corruption watchdog. 65% of respondents claimed in the report they had paid bribes to access public services.

Public services like schools and hospitals are seldom free to access in socialist Vietnam. Many state-owned schools charge tuition fees, blurring the lines between public and private. Last year, state-owned schools in Hanoi were allowed to raise tuition fees by US$5 a month, allowing some to charge US$110 or more per month.

Vietnamese media often quote an estimate of some 2.8 million public sector employees, representing roughly 4% of the working age population.

The Lowy Institute, an international think tank, reported last year that about 10% of all jobs in Vietnam are in the state sector. That figure included workers at SOEs, which account for less than 5% of total employment, according to the report.

Those figures, however, are intentionally hazy. In January, a Vietnamese state audit asserted that there are 57,000 public sector “ghost” positions, meaning posts that are paid but not occupied where superiors usually pocket the cash.

Vietnamese wear nationalistic garbs while watching a football game in Hanoi, Vietnam January 27, 2018. Photo: Reuters/Kham

Others in government think a wholesale reform of the civil service is needed. In 2016, Bui Sy Loi, vice chairman of the National Assembly’s Committee on Social Issues, claimed that 700,000 public sector employees, or roughly a third, were “incompetent” in their duties.

But at a time when concerns about inequality are rising, slashing public sector jobs could bring the Party’s already rocky relationship with the poor to a head. So, too, could government plans to charge more for basic welfare services to bolster state coffers.

For instance, the Health Ministry plans to increase the price of health care services, some by as much as 7%, from July. The ministry reckons the price hike will improve the finances of Vietnam Social Security (VSS), a public insurance scheme, by as much as US$174 million a year.

VSS, which provides funds towards medical costs, retirement, maternity and unemployment, has been in a precarious financial position for years. Some economic observers think that unless it starts to collect more revenues, it could start running into deficits by 2020 and eventually go broke.

VSS’s woes are a microcosm of the government’s bigger financial problems. Hanoi desperately needs more capital if it is to fund the infrastructure projects it needs to keep the economy growing and supposedly reduce poverty.

To pay those bills, though, it must reduce public sector jobs while raising the cost of public services. Small wonder, then, that a growing number of Vietnamese are pessimistic about their economic and financial futures.